The forward looking nature of FX options can offer clues on the outlook for a currency pair, and the price action in EUR/USD options is telling.
Demand for EUR calls (the right to buy EUR/USD) was strong in early May, with traded volumes at 2021 highs.
While that shows increased appetite to bet on EUR/USD gaining, the addition of more strikes has added congestion to existing technical resistance and option barriers, which can impede further topside progress in spot without a renewed catalyst. nL2N2NB0HR
Implied volatility is the options market's gauge of actual/expected volatility over a given time frame and determines premium - and it's edging lower.
Benchmark 1-month expiry is now 5.75 from 6.05 Tuesday and 6.25 last week - consistent with FX range trading and low actual volatility.
Risk reversals show which side of a currency pair demands the most volatility premium - 1-month expiry is 0.2 from 0.275 EUR calls over puts (topside).
The price reflects a market already long EUR calls, and when seen in conjunction with falling implied volatility, suggests a lack of conviction that further gains will be quick, or volatile.
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